CHINHOYI UNIVERSITY OF TECHNOLOGY

SCHOOL OF ENTREPRENEURSHIP AND BUSINESS SCIENCES

DEPARTMENT OF ACCOUNTING AND FINANCE
BACHELOR OF SCIENCE HONOURS DEGREE IN ACCOUNTANCY

NAME: NIGEL T KASEKE

REG NUMBER: C20141290L
LEVEL: 4.1 BLOCK RELEASE
MODULE: PERFORMANCE MANAGEMENT

Question 5
Working 1: Direct material cost

Parts to be replaced by standard parts = $40 x 0·8 = $32.

New cost of those at (100%-55%) x $32 = $14·40.

Unique irreplaceable parts: original cost = $40 x 20% = $8.

New cost $8 × (100%-10%) = $7·20

Revised direct material cost = $14·40 + $7·20 = $21·60

Working 2: Direct labour

Direct labour – cost per unit for first one hundred units:
Y = ax^-b.
45 x 100^–0·152 = 22·346654 minutes Total time for 100 units =
2,234·6654 minutes.

Time for the 100th unit:

Time for 99 units = 45 x 99^–0·152 = 22·380818 minutes.
For 99 units × 22·380818 minutes = 2,215·701 minutes.
Therefore, time for 100th unit = 2,234·6654 – 2,215·701 = 18·9644 minutes.

Time for remaining 49,900 units x 18·9644 minutes = 946,323·56 minutes.

Total labour time for 50,000 units (946,323·56 minutes + 2,234·6654 minutes) = 948,558·23
minutes
Therefore total labour cost = 948,558·23/60 x $34·67 = $548,108·56.

Therefore average labour cost per unit = $548,108·56/50,000 = $10·96.

Working 3: Rework cost

Total cost = 50,000 x 10% x $18 = $90,000.

Cost per average unit = $90,000/50,000 = $1·80.
5a) Revised target cost
$ $
Manufacturing cost
Direct material (working 1) 21.60
Direct labour (working 2) 10.96
Machine costs. 21.00
Quality control costs. 10.00
Rework costs (working 3) 1.80
Total 65.36
Product development cost. 25.00
Marketing cost. 35.00
Non-manufacturing costs. 60.00 Total
cost. 125.36
(b)Market skimming

Market skimming is a strategy that attempts to exploit those

areas of the market which are relatively insensitive to price
changes. Initially, high prices for the webcam would be
charged in order to take advantage of those buyers who
want to buy it as soon as possible, and are prepared to pay
high prices in order to do so.
The existence of certain conditions is likely to make the strategy a suitable one for
Makudo Co. These are as follows:

Where a product is new and different, so that customers are prepared to pay high
prices in order to gain the perceived status of owning the product early. The webcam
has superior audio sound and visual quality, which does make it different from other
webcams on the market.
•
• Where products have a short life cycle this strategy is more likely to be used,
because of the need to recover development costs and make a profit quickly. The
webcam does only have a two year life cycle, which does make it rather short.
•
• Where high prices in the early stages of a product’s life cycle are expected to
generate high initial cash inflows. If this were to be the case for the webcam, it
would be particularly useful for Makudo Co because of the current liquidity
problems the company is suffering. Similarly, skimming is useful to cover high
initial development costs, which have been incurred by Makudo Co.
Where barriers to entry exist, which deter other competitors from entering the
market; as otherwise, they will be enticed by the high prices being charged. These
might include prohibitively high investment costs, patent protection or unusually
strong brand loyalty. It is not clear from the information whether this is the case
for Makudo Co.
•
• Where demand and sensitivity of demand to price are unknown. In Makudo
Co’s case, market research has been carried out to establish a price based on
the customers’ perceived value of the product. The suggestion therefore is
that some information is available about price and demand, although it is not
clear how much information is available.
•
It is not possible to say for definite whether this pricing strategy would be suitable
for Makudo Co, because of the limited information available. However, it does
seem unusual that a high-tech, cutting edge product like this should be sold at the
same price over its entire, short life cycle. Therefore, price skimming should be
investigated further, presuming that this has not already been done by Makudo
Co.